dothesums blog

Interest rates on loans is of great interest to investors. Not only are we seeing a reduction in the products available, but we are seeing higher rates and arrangement fees.

The Bank of England base rate is currently 5%, with the prospect of a 0.25% reduction next month. However, the money market rate is about 5.8% and the general expectation is that the two will come more closely into line.

Follow up:

Some think that the central banks ought to cut rates faster? Well up to a point we would agree, but no one wants to see rates so low that they encourage inflation. We discount all cash flows in our appraisals with inflation, so that we are comparing values, on a like for like basis. We use the Retail Price Index rather than the Consumer Price Index, because it more closely resembles reality. Currently the RPI is 3.8% and the RPIX, which excludes mortgage payments, is 3.5%.

There is still money in the property market and evidence that some investors are taking the long view and looking for properties that have fallen in value. As always, it pays to compute discounted cash flows when assessing a possible purchase, because cash is king everywhere.